The Information Contents of Stock Price Change and Earnings Recognition －Earnings Recognition Timeliness of Korean Stock Market－
Asian Tax Journal Vol. 17 No. 2 (2016), pp. 35-63
Abstract
This study investigates the relation between information in stock price changes and earnings recognition timeliness (ERT) using Korean firms listed on the Korean Stock Exchange. Prior studies find low informamativeness in stock prices and a low earnings quality in the Korean stock market, which cause the recognition of earnings to be inclined more to short－term information. Using the empirical model of Ball and Easton (2013), this study analyze earnings timeliness of listed firms in Korean Stock Exchange by examining the relation between daily stock price changes and annual net income. The empirical analysis of this study supports this conjecture. Especially in years of negative stock price changes, the information in the stock price changes near the end of the fiscal year is recognized more dominantly in earnings. When the sample is divided into before and after the Asian Financial Crisis, the empirical results of this study show that earnings recognition tends to be more short－term and negative－information－oriented after the crisis. Contrary to the argument of prior study, expense is mechanically and passively matched to revenue in Korean firms, rather than actively recognize expectations regarding future earnings. In addition, results show that the earning components of operating cash flows and accruals recognize information differently. Accruals (operating cash flows) generally recognize the information in the stock price changes near the beginning (end) of the fiscal year. This study makes several contributions to the literature. First, this study finds Korean firms’ unique characteristics in earnings recognition timeliness. Second, regarding recognition of information, this study shows that operating cash flows and accruals plays different roles from each other. Finally, this study supports the argument that the changes in institutional environment affects the relation between the information in stock prices and accounting information by showing that earnings recognition timeliness changed after the Asian financial crisis in late 90’s.
Keywords
- recognition of earnings
- timeliness
- stock price change *
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